m

m
In order to maintain uniformity and consistency in preparing and maintaining books of accounts,
certain rules or principles have been evolved. These rules/principles are classified as concepts and
conventions. These are foundations of preparing and maintaining accounting records. In this lesson we
shall learn about various accounting concepts, their meaning and significance.
6

îfter studying this lesson, you will be able to :
Vm explain the term accounting concept;
Vm explain the meaning and significance of various accounting concepts
: Business Entity, Money Measurement, Going Concern, îccounting
Period, Cost Concept, Duality îspect concept, Realisation Concept,
îccrual Concept and Matching Concept.
m
a

et us take an example. In India there is a basic rule to be followed by everyone that one should
walk or drive on his/her left hand side of the road. It helps in the smooth flow of traffic. Similarly, there
are certain rules that an accountant should follow while recording business transactions and
preparing accounts. These may be termed as accounting concept. Thus, this can be said that :
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The main objective is to maintain uniformity and consistency in accounting records. These concepts
constitute the very basis of accounting. îll the concepts have been developed over the years from
experience and thus they are universally accepted rules. Following are the various accounting
concepts that have been discussed in the following sections :

Vm Business entity concept

Vm Money measurement concept
Vm Going concern concept
Vm îccounting period concept
Vm îccounting cost concept
Vm Duality aspect concept
Vm Realisation concept
Vm îccrual concept
Vm Matching concept

Π   
 

This concept assumes that, for accounting purposes, the business enterprise and its owners are two
separate independent entities. Thus, the business and personal transactions of its owner are separate. For
example, when the owner invests money in the business, it is recorded as liability of the
business to the owner. Similarly, when the owner takes away from the business cash/goods for his/her
personal use, it is not treated as business expense. Thus, the accounting records are made in the books of
accounts from the point of view of the business unit and not the person owning the business. This
concept is the very basis of accounting. et us take an example. Suppose Mr. Sahoo started business
investing Rs100000. He purchased goods for Rs40000, Furniture for Rs20000 and plant and machinery
of Rs30000. Rs10000 remains in hand. These are the assets of the business and not of the owner.
îccording to the business entity concept Rs100000 will be treated by business as capital i.e. a liability
of business towards the owner of the business.Now suppose, he takes away Rs5000 cash or goods worth
Rs5000 for his domestic purposes. This withdrawal of cash/goods by the owner from the business is his
private expense and not an expense of the business. It is termed as Drawings. Thus, the business entity
concept states that business and the owner are two separate/distinct persons. îccordingly, any expenses
incurred by owner for himself or his family from business will be considered as expenses and it will be
shown as drawings.




The following points highlight the significance of business entity concept :

Vm This concept helps in ascertaining the profit of the business as only the business expenses and
revenues are recorded and all the private and personal expenses are ignored.
Vm This concept restraints accountants from recording of owner¶s private / personal transactions.
Vm It also facilitates the recording and reporting of business transactions from the business point of
view
Vm It is the very basis of accounting concepts, conventions and principles.
m

6


6 
m

m
Fill in the blanks with suitable word/words
(i) The accounting concepts are basic ....................... of accounting.
(ii) The main objective of accounting concepts is to maintain .......................
and ....................... in the accounting record.
(iii) ....................... concept assumes that business enterprise and its owners
are two separate independent entities.
(iv) The goods drawn from business for owner¶s personal use are called«««..

 a
a
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This concept assumes that all business transactions must be in terms of money, that is in the currency of
a country. In our country such transactions are in terms of rupees. Thus, as per the money measurement
concept, transactions which can be expressed in terms of money are recorded in the books of accounts.
For example, sale of goods worth Rs.200000, purchase of raw materials Rs.100000, Rent Paid Rs.10000
etc. are expressed in terms of money, and so they are recorded in the books of accounts. But the
transactions which cannot be expressed in monetary terms are not recorded in the books of accounts. For
example, sincerity, loyality, honesty of employees are not recorded in books of accounts because these
cannot be measured in terms of money although they do affect the profits and losses of the business
concern. înother aspect of this concept is that the records of the transactions are to be kept not in the
physical units but in the monetary unit. For example, at the end of the year 2006, an organisation may
have a factory on a piece of land measuring 10 acres, office building containing 50 rooms, 50 personal
computers, 50 office chairs and tables, 100 kg of raw materials etc. These are expressed in different
units. But for accounting purposes they are to be recorded in money terms i.e. in rupees. In this case, the
cost of factory land may be say Rs.12 crore, office building of Rs.10 crore, computers Rs.10 lakhs,
office chairs and tables Rs.2 lakhs, raw material Rs.30 lakhs. Thus, the total assets of the organisation
are valued at Rs.22 crore and Rs.42 lakhs. Therefore, the transactions which can be expressed in terms
of money is recorded in the accounts books, that too in terms of money and not in terms of the quantity.




The following points highlight the significance of money measurement concept :
Vm This concept guides accountants what to record and what not to record.
Vm It helps in recording business transactions uniformly.
Vm If all the business transactions are expressed in monetary terms, it will
be easy to understand the accounts prepared by the business enterprise.
Vm It facilitates comparison of business performance of two different
periods of the same firm or of the two different firms for the same period.
6


6 

Put a tick mark (Ö) against the information that should be recorded in the
books of accounts and cross mark (×) against the information that should
not be recorded
(i) Health of a managing director
(ii) Purchase of factory building Rs.10 crore
(iii) Rent paid Rs.100000
(iv) Goods worth Rs.10000 given as charity
(v) Delay in supply of raw materials

   

This concept states that a business firm will continue to carry on its activities for an indefinite period of
time. Simply stated, it means that every business entity has continuity of life. Thus, it will not be
dissolved in the near future. This is an important assumption of accounting, as it provides a basis for
showing the value of assets in the balance sheet; For example, a company purchases a plant and
machinery of Rs.100000 and its life span is 10 years. îccording to this concept every year some amount
will be shown as expenses and the balance amount as an asset. Thus, if an amount is spent on an item
which will be used in business for many years, it will not be proper to charge the amount from the
revenues of the year in which the item is acquired. Only a part of the value is shown as expense in the
year of purchase and the remaining balance is shown as an asset.
m




The following points highlight the significance of going concern concept;
Vm This concept facilitates preparation of financial statements.
Vm On the basis of this concept, depreciation is charged on the fixed asset.
Vm It is of great help to the investors, because, it assures them that they will continue to get income
on their investments.
Vm In the absence of this concept, the cost of a fixed asset will be treated as an expense in the year of
its purchase.
Vm î business is judged for its capacity to earn profits in future.
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6 


Fill in the blanks by selecting correct words given in the bracket/brackets:

(i) Going concern concept states that every business firm will continue
to carry on its activities «««««.. (for a definite time period, for
an indefinite time period)
(ii) Fixed assets are shown in the books at their «««««.. (cost price,
market price)
(iii) The concept that a business enterprise will not be closed down in the
near future is known as «««««.. (going concern concept, money
measurement concept)
(iv) On the basis of going concern concept, a business prepares its
.......................... (financial statements, bank statement, cash statement)
(v) ........................... concept states that business will not be dissolved in
near future. (Going concern, Business entity)

ÿ 
   

m
îll the transactions are recorded in the books of accounts on the assumption that profits on these
transactions are to be ascertained for a specified period. This is known as accounting period concept.
Thus, this concept requires that a balance sheet and profit and loss account should be prepared at regular
intervals. This is necessary for different purposes like, calculation of profit, ascertaining financical
position, tax computation etc. Further, this concept assumes that, indefinite life of business is divided
into parts. These parts are known as îccounting Period. It may be of one year, six months, three months,
one month, etc. But usually one year is taken as one accounting period which may be a calender year or
a financial year. Year that begins from 1st of January and ends on 31st of December, is known as
Calendar Year. The year that begins from 1st of îpril and ends on 31st of March of the following year,
is known as financial year. îs per accounting period concept, all the transactions are recorded in the
books of accounts for a specified period of time. Hence, goods purchased and sold during the period,
rent, salaries etc. paid for the period are accounted for and against that period only.




Vm It helps in predicting the future prospects of the business.
Vm It helps in calculating tax on business income calculated for a particular time period.
Vm It also helps banks, financial institutions, creditors, etc to assess and analyse the performance of
business for a particular period.
Vm It also helps the business firms to distribute their income at regular
intervals as dividends.
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Fill in the blanks with suitable word/words.

(i) Recording of transactions in the books of accounts with a definite
period is called ««««««. concept.
(ii) The commonly accepted accounting period in India is ««««««.
(iii) îccording to accounting period concept, revenue and expenses are
related to a ««««««. period.
(iv) If accounting year begins from 1st of January, and ends on 31st of
December, it is known as ««««««.
(v) If accounting year begins from 1st of îpril and ends on 31st of March,
then accounting year is known as ««««««.
m

D 
   

îccounting cost concept states that all assets are recorded in the books of accounts at their purchase
price, which includes cost of acquisition, transportation and installation and not at its market price. It
means that fixed assets like building, plant and machinery, furniture, etc are recorded in the books of
accounts at a price paid for them. For example, a machine was purchased by XYZ imited for
Rs.500000, for manufacturing shoes. în amount of Rs.1,000 were spent on transporting the machine to
the factory site. In addition, Rs.2000 were spent on its installation. The total amount at which the
machine will be recorded in the books of accounts would be the sum of all these items i.e. Rs.503000.
This cost is also known as historical cost. Suppose the market price of the same is now Rs 90000 it will
not be shown at this value. Further, it may be clarified that cost means original or acquisition cost only
for new assets and for the used ones, cost means original cost less depreciation. The cost concept is also
known as historical cost concept. The effect of cost concept is that if the business entity does not pay
anything for acquiring an asset this item would not appear in the books of accounts. Thus, goodwill
appears in the accounts only if the entity has purchased this intangible asset for a price.





Vm This concept requires asset to be shown at the price it has been acquired,
which can be verified from the supporting documents.
Vm It helps in calculating depreciation on fixed assets.
Vm The effect of cost concept is that if the business entity does not pay
anything for an asset, this item will not be shown in the books of accounts.
m

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Fill in the blanks with suitable word/wordsm

(i) The cost concept states that all fixed assets are recorded in the books
of accounts at their ««««. price.
(ii) The main objective to adopt historical cost in recording the fixed assets
is that the cost of the assets will be easily verifiable from the ««««.
documents.
(iii) The cost concept does not show the ««««. of the business.
(iv) The cost concept is otherwise known as ««««. concept.

 

   

Dual aspect is the foundation or basic principle of accounting. It provides the very basis of recording
business transactions in the books of accounts. This concept assumes that every transaction has a dual
effect, i.e. it affects two accounts in their respective opposite sides. Therefore, the transaction should be
recorded at two places. It means, both the aspects of the transaction must be recorded in the books of
accounts. For example, goods purchased for cash has two aspects which are
(i) Giving of cash
(ii) Receiving of goods. These two aspects are to be recorded. Thus, the duality concept is commonly
expressed in terms of fundamental
accounting equation : îssets = iabilities + Capital
The above accounting equation states that the assets of a business are always equal to the claims of
owner/owners and the outsiders. This claim is also termed as capital or owners equity and that of
outsiders, as liabilities or creditors¶ equity. The knowledge of dual aspect helps in identifying the two
aspects of a transaction which helps in applying the rules of recording the transactions in books of
accounts. The implication of dual aspect concept is that every transaction has an equal impact on assets
and liabilities in such a way that total assets are always equal to total liabilities. et us analyse some
more business transactions in terms of their dual aspect :
1. Capital brought in by the owner of the business
The two aspects in this transaction are :
(i) Receipt of cash
(ii) Increase in Capital (owners equity)
2. Purchase of machinery by cheque
The two aspects in the transaction are
(i) Reduction in Bank Balance
(ii) Owning of Machinery
3. Goods sold for cash
The two aspects are
(i) Receipt of cash
(ii) Delivery of goods to the customer
4. Rent paid in cash to the landlord
The two aspects are
(i) Payment of cash
(ii) Rent (Expenses incurred).
Once the two aspects of a transaction are known, it becomes easy to apply the rules of accounting and
maintain the records in the books of accounts properly. The interpretation of the Dual aspect concept is
that every transaction has an equal effect on assets and liabilities in such a way that total assets are
always equal to total liabilities of the business.




Vm This concept helps accountant in detecting error.
Vm It encourages the accountant to post each entry in opposite sides of two affected accounts
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Vm It helps in making the accounting information more objective.
Vm It provides that the transactions should be recorded only when goods are delivered to the buyer.
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îscertain the amount of current revenue realized for the year ending 31st
December 2006
(i) în order, to supply goods for Rs.20,00,000 is received in the year 2006. The goods have been
supplied only for Rs.10,00,000 in 2006.
(ii) What will be the revenue (i) if the payment of Rs.6,00,000 is received in cash in 2006 and the
balance payment of Rs.4,00,000 received in 2007.
(iii) What will be the revenue if the goods have been sold on credit and the payment of Rs.1500000 is
received in the year 2007, while all the goods of Rs.20,00,000 are supplied in the year 2006.
(iv) What will be the revenue if an advance payment of Rs.100,000 is received in the year 2006 and the
balance received in the year 2007.
 

 

The meaning of accrual is something that becomes due especially an amount of money that is yet to be
paid or received at the end of the accounting period. It means that revenues are recognised when they
become receivable. Though cash is received or not received and the expenses are recognized when they
become payable though cash is paid or not paid. Both transactions will be recorded in the accounting
period to which they relate. Therefore, the accrual concept makes a distinction between the accrual
receipt of cash and the right to receive cash as regards revenue and actual payment of cash and
obligation to pay cash as regards expenses. The accrual concept under accounting assumes that revenue
is realised at the time of sale of goods or services irrespective of the fact when the cash is received. For
example, a firm sells goods for Rs 55000 on 25th March 2005 and the payment is not received until 10th
îpril 2005, the amount is due and payable to the firm on the date of sale i.e. 25th March 2005. It must
be included in the revenue for the year ending 31st March 2005. Similarly, expenses are recognised at
the time services provided, irrespective of the fact when actual payment for these services are made. For
example, if the firm received goods costing Rs.20000 on 29th March 2005 but the payment is made on
2nd îpril 2005 the accrual concept requires that expenses must be recorded for the year ending 31st
March 2005 although no payment has been made until 31st March 2005 though the service has
been received and the person to whom the payment should have been made is shown as creditor. In
brief, accrual concept requires that revenue is recognised when realized and expenses are recognised
when they become due and payable without regard to the time of cash receipt or cash payment.




Vm It helps in knowing actual expenses and actual income during a particular time period.
Vm It helps in calculating the net profit of the business.
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6 
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Fill in the blanks with suitable word/words :

(i) îccrual concept relates to the determination of ...................
(ii) Goods of Rs.50000 are sold on 25th March 2006 but payment is received on 10th îpril 2006. It will
be a revenue for the year ending ....................
(iii) îccrual concept requires revenue is recognised when ................... and expenses are recognised
when they become ...................
† a
m 
The matching concept states that the revenue and the expenses incurred to earn the revenues must
belong to the same accounting period. So once the revenue is realised, the next step is to allocate it to the
relevant accounting period. This can be done with the help of accrual concept. et us study the
following transactions of a business during the month of December, 2006
(i) Sale : cash Rs.2000 and credit Rs.1000
(ii) Salaries Paid Rs.350
(iii) Commission Paid Rs.150
(iv) Interest Received Rs.50
(v) Rent received Rs.140, out of which Rs.40 received for the year 2007
(vi) Carriage paid Rs.20
(vii) Postage Rs.30
(viii) Rent paid Rs.200, out of which Rs.50 belong to the year 2005
(ix) Goods purchased in the year for cash Rs.1500 and on credit Rs.500
(x) Depreciation on machine Rs.200
et us record the above transactions under the heading of Expenses and Revenue.
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In the above example expenses have been matched with revenue i.e (Revenue Rs.3150-Expenses
Rs.2900) This comparison has resulted in profit of Rs.250. If the revenue is more than the expenses, it is
called profit. If the expenses are more than revenue it is called loss. This is what exactly has been done
by applying the matching concept. Therefore, the matching concept implies that all revenues earned
during an accounting year, whether received/not received during that year and all cost incurred, whether
paid/not paid during the year should be taken into account while ascertaining profit or loss for that year.




Vm It guides how the expenses should be matched with revenue for
determining exact profit or loss for a particular period.
Vm It is very helpful for the investors/shareholders to know the exact
amount of profit or loss of the business.
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6 


Fill in the blanks with suitable word/words :

(i) Expenses are matched with ««....««. generated during a period.
(ii) Goods sold for cash is an example of ««....««.
(iii) Salaries paid is an example of ««....««.
(iv) Income is the excess of ««....««. over ««....««.
(v) ««....««. concept states that the revenue and the expenses
incurred to earn the revenue must belong to the same accounting
period
(vi) ««....««. concept states how the expenses should be compared
with revenues for ascertaining exact profit or loss for a particular
period.
Ë
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Vm îccounting concept refers to the basic assumptions which serve the basis of recording actual
business transactions.
Vm The important accounting concepts are business entity, money measurement, going concern,
accounting period, cost concept, duality aspect concept, realisation concept, accrual concept, an
matching concept.
Vm Business entity concept assumes that for accounting purposes, the
business enterprise and its owner(s) are two separate entities.
Vm Money measurement concept assumes that all business transactions
must be recorded in the books of accounts in terms of money.
Vm Going concern concept states that a business firm will continue to carry
on activities for an indefinite period of time.
Vm îccounting period concept states that all the business transactions are
recorded in the books of accounts on the assumption that profits of
transactions is to be ascertained for a specified time period.
Vm îccounting cost concept states that all assets are recorded in the books
of accounts at their cost price.
Vm Dual aspect concept states that every transaction has a dual effect.
Vm Realisation concept states that revenue from any business transaction
should be included in the accounting records only when it is realised
Vm Matching concept states that the revenue and the expenses incurred to
earn the revenue must belong to the same accounting period

 

m 
m
1. Explain meaning and significance of going concern concept.
2. What do you mean by business entity concept?
3. State meaning and significance of money measurement concept.
4. Write short notes on the following
(a) Cost concept
(b) îccrual concept
(c) Matching concept
(d) îccounting period concept
5. What do you mean by accounting concept? Explain any four accounting
concepts.


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Intext Questions 1
(i) rules (ii) uniformity and consistency (iii) Business entity concept (iv) drawings
Intext Question 2
(i) × (ii) ҏ(iii) ҏ(iv) ҏ(v) ×
Intext Question 3
(i) for an indefinite time period (ii) cost price (iii) going concern concept (iv) financial statements
(v) Going concern
Intext Question 4
(i) accounting period (ii) one year (iii) particular (iv) calender year
Intext Question 5
(i) purchase (ii) supporting (iii) true net worth (iv) historical cost
Intext Question 6
(i) Owner¶s capital, cash (ii) Goods received, cash (iii) Cash received, goods sold (iv) Furniture, cash
(v) Cash, Sharma (vi) Machine, Rama (vii) Ram, cash (viii) Salaries, cash (ix) Rent, cash (x) Cash, rent
Intext Question 7
(i) Rs.10,00,000 (ii) Rs.10,00000 (iii) Rs.20,00000 (iv) Rs.1,00,000
Intext Question 8
(i) income (ii) 31st March, 2006 (iii) realised, due
Intext Question 9
(i) revenue (ii) revenue (iii) expense (iv) revenue, expenses (v) matching (vi) matching